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Oil traders lose faith in recent rally, position for lower prices

Thu, Apr 14, 2016 - 2:37 PM

Oil traders have ramped up their bets in the futures and options market that April's rally will run out of steam, as the outlook for demand weakens and with few clear signs of an end in sight to a supply glut.

PHOTO: BLOOMBERG

[SINGAPORE] Oil traders have ramped up their bets in the futures and options market that April's rally will run out of steam, as the outlook for demand weakens and with few clear signs of an end in sight to a supply glut.

While prices for front-month delivery Brent crude futures rallied by as much as 20 per cent this month, sparking hopes of an end to a rout that had previously pulled the market down by as much as 70 per cent since 2014, data for contracts for later delivery looks much weaker.

The spread between Brent for delivery in December 2017 and those for delivery next month has halved since March 1 to just US$4.40 per barrel, and in some cases even wiping out the contango, a price curve where contracts are more expensive going forward than for prompt delivery.

US bank Morgan Stanley said in a note to clients that it was "bearish oil prices" into the second half of the year and that "given producer hedging appetite into 2017 and the storage situation (full tanks), which requires at least some contango."

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With no end in sight to a production glut and also increasing worries on the demand side, with the Organization of the Petroleum Exporting Countries (Opec) cutting its consumption forecast this week, traders are positioning themselves for further price falls.

In the options arena, the number of put options tied to the July US$30 strike price has increased by 150 per cent, or 4,700 contracts, since mid-March, indicating a swell in bearish sentiment tied to that time frame.

Put options give a trader the opportunity to sell a product at a certain price, so a July put at US$30 per barrel would make money if prices, currently around US$43.50 per barrel, hit that level by summer.

Put open interest also increased by more than a third at the December US$30 strike, suggesting a growing bearish mood towards Brent prices towards year-end as well.

"On the supply-side, I haven't seen any convincing signs that production will fall towards consumption anytime soon. In fact, on the demand-side there are some concerns that consumption could slow. That leads me to think that the glut will either stay as it is or get worse, and that would require lower oil prices," said an oil trader at a commodity merchant house.

If the recent oil price rally does come to an end soon, it would mark an almost exact repeat of events in 2015, when crude futures doubled between January and early May only to peak and then tumble to 13-year lows over the course of the rest of the year.